China stock market freezing up as sell-off gathers pace

SHANGHAI (Reuters) - China's tumbling stock market showed signs of seizing up on Wednesday, as companies scrambled to escape the rout by having their shares suspended and indexes plunged after the securities regulator warned of "panic sentiment" gripping investors.

Beijing, which has struggled for more than a week to bend the market to its will, unveiled yet another battery of measures to arrest the sell-off, and the People's Bank of China said it would step up support to brokerages enlisted to prop up shares.

The CSI300 index <.CSI300> of the largest listed companies in Shanghai and Shenzhen closed down 6.8 percent, while the Shanghai Composite Index <.SSEC> dropped 5.9 percent.

With nearly half the market on a trading halt and another round of margin calls forcing leveraged investors to dump whatever shares could find a buyer, blue chips that had been supported by stabilization funds earlier in the week bore the brunt.

"I've never seen this kind of slump before. I don't think anyone has. Liquidity is totally depleted," said Du Changchun, an analyst at Northeast Securities.

"Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips."

More than 30 percent has been knocked off the value of Chinese shares since mid-June, and for some global investors the fear that China's market turmoil will destabilize the real economy is now a bigger risk than the crisis in Greece.

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A floor trader reacts as he checks share prices during morning trading at the Hong Kong Exchanges in …
"Also, the ripple effect from the market correction has yet to show up," wrote Bank of America Merrill Lynch analysts in a note. "We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis."

Commodities markets reflected growing concerns about the broader health of the world's second largest economy, with copper prices falling to a six-year low, Shanghai nickel futures sliding by their 5 percent daily limit, and oil falling toward $56 a barrel, near a three month-low.

TRADING HALTS

More than 500 China-listed firms announced trading halts on the Shanghai and Shenzhen exchanges on Wednesday, taking total suspensions to about 1,300 - 45 percent of the market or roughly $2.4 trillion worth of stock - as companies scuttled to sit out the carnage.

With so many small-cap companies sheltering on the sidelines, the ChiNext growth board <.CHINEXTC>, which has seen some of the biggest swings in valuations, fell a modest 0.8 percent.

The plunge in China's previously booming stock markets, which had more than doubled in the year to mid-June, is a major headache for President Xi Jinping and China's top leaders, who are already grappling with slowing growth.

Beijing's interventionist response has also raised questions about its ability to enact the market liberalization steps that are a centerpiece of its economic reform agenda.

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Investors watch an electronic board showing stock information at a brokerage office in Beijing, Chin …
China has orchestrated brokerages and fund managers to promise to buy billions of dollars' worth of stocks, helped by a state-backed margin finance company which the central bank pledged on Wednesday to provide sufficient liquidity.

The securities regulator said the Securities Finance Corp had provided 260 billion yuan ($41.8 billion) to 21 brokerages, though that sum is only 40 percent of the amount of leveraged positions that investors have cut since June 18.

RETAIL INVESTORS

Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China trade, which exacerbates volatility.

"It's uncommon to see so many shares posting consecutive daily limit falls, and the index futures swinging so wildly," said Wang Feng, CEO and founder of hedge fund firm Alpha Squared Capital Co and a former Wall Street trader.
"It's a stampede. And the problem of the market is that all the players move in the same direction, and are too emotional."

A surprise interest-rate cut by the central bank at the end of June, relaxations in margin trading and other "stability measures" have done little to calm investors.

The barrage of official commentary and new support measures continued throughout Wednesday's trading session, without visible effect.

Deng Ge, a spokesman for the China Securities Regulatory Commission, said in remarks posted on its official channel on Weibo, China's version of Twitter, that there had been a big increase in "irrational selling" of stocks.

Government agencies also announced that insurers would be allowed to by more blue chips and urged major shareholders and top executives to buy their own shares.

But the market sell-off has extended beyond the mainland, with Chinese stocks on U.S. exchanges falling as much as 6.1 percent on Tuesday, according to the Bank of New York Mellon index of such securities <.BKCN>.

"Investors are extremely unimpressed with their sudden conscription into national service, and you can see that in their share prices," said Matthew Smith, a strategist who covers the China financials sector for Macquarie.

Government intervention in equity markets never works, it screws with proper valuations. The same goes for price ceilings and price floors. A good example is the minimum wage increase in san Francisco, in the end it will only hurt those with lower disposable income.

"Freedom isn't free" --Colonel Walter Hitchcock
“The most important six inches on the battlefield is between your ears.” General 'Mad Dog' James Mattis
non semper erit aestas- It will not always be summer (be prepared for hard times)!!

"Freedom isn't free" --Colonel Walter Hitchcock
“The most important six inches on the battlefield is between your ears.” General 'Mad Dog' James Mattis
non semper erit aestas- It will not always be summer (be prepared for hard times)!!

While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it’s already being called China’s 1929 – the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression.

In any normal summer, a 30pc fall in the Chinese stock market – a loss of value roughly equivalent to the UK’s entire economic output last year – after an ascent which had seen share prices more than double within the space of a year would have been front page news across the globe.

The dramatic series of government interventions to stem the panic – hitherto unsuccessful, it should be added – would similarly have been up there at the top of the news agenda. Yet the pantomime of the Greek debt talks, together with the tragi-comedy of will they, won’t they leave the euro, has relegated the story to little more than a footnote - even though 940 companies, more than a third, have now suspended trading on China’s two main indices.

"America in 1929 and China today – are at roughly similar stages of economic development"
The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess.

True, the Chinese stock market bubble is only a one-year wonder, whereas the build-up to the Wall Street Crash of 1929 was more sustained. Even so, the comparison still holds. As noted by JK Galbraith in his classic account, The Great Crash 1929, even as late as 1927 it was possible to argue that American stocks represented fair value.

It was only in the final year that the “escape into make-believe” happened in earnest, when the stock market rose by nearly 50pc. This applies to the Shanghai Composite, too. Stripping out the lowly-rated banking sector, valuations for just about everything else have rocketed, making those that ruled on Wall Street in the run-up to October 24, 1929, look relatively modest. Nor do the similarities end there. As in 1920s America, China’s stock market boom has ridden in tandem with an equally speculative real estate bubble.

The macro-economic backdrop is also surprisingly similar. Then, as now in China, rural workers had emigrated to the cities in vast numbers in the hope of finding a more prosperous life in fast-growing industrial sectors. In 1920s America, virtually all these sectors – from steel to automobiles and the new technologies of radio and consumer durables – grew like Topsy, inspiring households to invest in them and chase the apparently bountiful profits they were generating.

A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history before, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate.

Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash – depressed commodity prices and a virtual hiatus in global trade growth. The Chinese economy is like one of those cartoon characters who manages to keep running long after leaving the edge of the cliff, only belatedly to look down and plunge into the abyss.

Naturally, there are many dissimilarities too, not least that China is still essentially a planned and centrally-controlled economy which has so far managed to defy the usual rules of economics. The consensus is that this time will be no different, that even if the stock market does continue to crash, the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus, the wider economy barely lost a beat. Have no fear, the Chinese authorities have it all under control. Believe it if you will.

I don’t buy it. Indeed, I can see very little evidence for China’s technocratic elite having things under control. The firebreaks that China put in place over the weekend to mitigate the panic are, in practice, not much different from those applied during the Great Crash of 1929, only this time it’s public rather than private money that promises to quell the fire. They failed spectacularly in 1929. This time around, they’ve thrown the kitchen sink at the problem, but so far it has produced only a mild, and wholly unconvincing, rebound. The fire still smoulders, threatening to break out anew.

"China cannot forever, Greenspan-like, keep answering each successive bubble by creating another"
Besides, China cannot forever, Greenspan-like, keep answering each successive bubble by creating another. First it was gold, then housing, and when cooling measures threatened an all-out bust in the property and construction markets, the taps were turned on afresh, producing a further flood of money into the stock market. The authorities were happy to tolerate the bull market at first, hoping it might encourage a switch from debt to equity financing, but there seems little chance of that now. The stock market boom has only succeeded in adding to the debt.

Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and more particularly its shadow banking sector, as it pretends.

One further thought on these parallels. Now that the export-led model of economic of growth seems to have reached its natural end, at least for China, president Xi Jinping pins his hopes on internal consumer demand to drive growth, and he’s vowed to continue with the free-market reforms of predecessors to help achieve this. Unfortunately, it’s proving a difficult transition. Part of the problem with free markets is that by definition they cannot be controlled. Busts are as much part of their DNA as the wealth-enhancing properties of their booms. As China is about to discover, bad downturns come with the territory.

"Freedom isn't free" --Colonel Walter Hitchcock
“The most important six inches on the battlefield is between your ears.” General 'Mad Dog' James Mattis
non semper erit aestas- It will not always be summer (be prepared for hard times)!!

The Chinese economy is a bubble waiting to pop. As their population ages their workforce will shrink dramatically due to the single child policy. This smaller workforce will have a large burden to support the retired at nearly a one to one ratio. It's already becoming more and more expensive to manufacture there. Notice that China has been buying foreign corporations (like the number 1 US pork producer Smithfield).

This is not a good thing, I fear. Many US companies are dependent on the Chinese work force and economy. This could have a ripple effect.

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This WILL have a ripple effect........

"Freedom isn't free" --Colonel Walter Hitchcock
“The most important six inches on the battlefield is between your ears.” General 'Mad Dog' James Mattis
non semper erit aestas- It will not always be summer (be prepared for hard times)!!

It is actually worse than gets out. Remember that China is a centrally controlled economy, one political mistep and the distortions propagate. For example, they went on a housing building spree a few years ago to allow for expanded population, then set the one child policy. Now, there's more MT housing, and the state income for the construction stiffs no longer exists. Markets for cheap manufactured goods is saturated, so there's no hiring to speak of. The government is propping up the market with dollars it gained in the boom days, and the dollar supply is NOT unlimited.

China has built Mega Cities all over their country that are not being used. Why?
This is all a "Shell Game!"

A Man without a plan, is a Man Without A Plan!! Hurricanes, Tornado's, Floods, Power outages, Civil Unrest...... Pick your poison, how many times do you hear the words "We were totally Unprepared for this, we never expected....." Nuff Said.

As predicted, the Chinese stock market accelerated its decline on Wednesday despite efforts by Chinese government officials to slow it.

The combination of over-leveraged investors with little prior experience and the prudent use of margin to buy stocks has turned the decline of the Chinese stock market into a rout. Closing on Wednesday at 3,507, the Shanghai Index has lost one-third of its value just since June 12 when it hit 5,178. The smaller Shenzhen Composite, made up of smaller technology stocks, is down 40 percent.

Jeremy Warner, economics commentator and assistant editor at London’s Daily Telegraph, viewed the carnage and remarked: "The firebreaks that China put in place over the weekend to mitigate the panic are, in practice, not much different from those applied during [America’s] Great Crash of 1929…. [Chinese officials] have thrown the kitchen sink at the problem but so far it has produced a … wholly unconvincing rebound."

The kitchen sink analogy is apt. The Chinese government has lowered interest rates four times since the first of the year, has provided some $45 billion to brokerage houses to assist their customers to expand their margin accounts (some already allowing a six-to-one margin facility) to buy more stocks, and has told its publicly-traded companies to buy back more of their own stocks. It has told commentators not to use certain words or phrases when writing about the collapse, like “equity disaster” and “rescue the market.”

It has prohibited short sellers from taking the market down even faster, while allowing brokerage houses offering margin accounts to let their customers use their homes and apartments as collateral.

Nearly half of the companies with stocks traded on the Shanghai Index have stopped trading altogether in light of the pummeling they have taken. This means that margin calls will be more and more concentrated in the issues still trading, exacerbating the decline.

China even sanctioned one Mr. Tian, the manager of a technology and science company in Beijing, for putting up video clips and screen shots of a man jumping to his death last Friday. That “provoked emotional responses among stock investors who suffered losses over the past weeks,” according to the state-run news agency Xinhua.

Chinese citizens with investable funds have piled into stocks as the real estate market has tanked. As the stock market moved higher, some 90 million new trading accounts were opened, many of them margin accounts — the famous two-edged sword that works wonders in an up market but is devastating in a down market.

If the bubble burst follows historical patterns, stocks could lose another 50 to 70 percent of their present value, bringing the Shanghai Index back to earth at between 1,500 and 2,000. But also, following the hypothesis that the market will revert to the mean but often overshoots to the downside, it could go much lower than that, with international implications.

Investors have also lost confidence in bonds, hurting real estate developers the most. Frank Huang, a bond trader at SinoPac Securities in Hong Kong, said, “People [have] lost confidence towards China’s credits. Everything is down. The riskier the bonds, the heavier they’re being sold. Property developers are [among] the biggest casualties.”

China is the world’s top consumer of copper, accounting for about 40 percent of global consumption. Pessimism about China’s economic prospects, exacerbated by the decline in Chinese stocks, has driven copper prices to a six-year low. The same is showing up in oil prices, which have fallen to levels not seen in months.

All told, throwing the kitchen sink at the crash in stocks has had about the same impact as throwing rocks at a runaway freight train in order to stop it. $4 trillion in market value has already been erased from investors’ portfolios in just the last three weeks. Those losses could double and triple as the bursting of this massive bubble runs its course. Morgan Stanley issued a “sell” on China weeks ago, and now expects the Shanghai Index to see 3,250 very soon. Citigroup told its clients that the sell-off has a “long way to go” with some predicting a bottom of 1,500 or lower by the end of the year.

With the Financial Times of London noting that with only a quarter of all margin calls having been met despite 11 straight days of selling, there will continue to be massive pressure to the downside, despite the tactics of the Chinese government. In fact, such scurrying of actions by those officials has only confirmed that the panic isn’t confined just to the stock market, but to the government as well.

One may reasonably expect the psychological damage in Shanghai to spread across the globe, especially in light of China’s position as the second-largest economy on the planet. That damage, much as it did at the beginning of the U.S. Great Depression, could slow economies worldwide.

"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin."

If I recall correctly, china had bought quite a bit of US property. Perhaps bargin prices are coming soon, to buy it back?

“Man’s mind is his basic tool of survival. Life is given to him, survival is not. His body is given to him, its sustenance is not. His mind is given to him, its content is not. To remain alive, he must act, and before he can act he must know the nature and purpose of his action. He cannot obtain his food without a knowledge of food and of the way to obtain it. He cannot dig a ditch-or build a cyclotron-without a knowledge of his aim and of the means to achieve it. To remain alive, he must think." John Galt (Ayn Rand)

Patents are not evil, profit is not a dirty word, providing for your family's future is not a sin, and what is mine is not your's just because you want it. Kellory.I have received NO secret government orders.(Watch for this notice to be removed)

If I recall correctly, china had bought quite a bit of US property. Perhaps bargin prices are coming soon, to buy it back?

Click to expand...

They did indeed buy US commercial properties, and drove the prices up in the process. I would not be too surprised to see some bargains in the high million FRN range coming along as margin calls at home proliferate. Actually, we have a long time member that might chime in and add to the analysis. Me, I don't hold anything asian to worry about except a few souvenir coins from when I was there, and none of those are Chinese.

But we hear today that the drop rate has moderated due to government actions. I don't think the fall is ended by any means, but there might be an extension of time until it bottoms out.

They did indeed buy US commercial properties, and drove the prices up in the process. I would not be too surprised to see some bargains in the high million FRN range coming along as margin calls at home proliferate. Actually, we have a long time member that might chime in and add to the analysis. Me, I don't hold anything asian to worry about except a few souvenir coins from when I was there, and none of those are Chinese.

But we hear today that the drop rate has moderated due to government actions. I don't think the fall is ended by any means, but there might be an extension of time until it bottoms out.

Click to expand...

Asian goods?

Well now I have a nice hand made Blue Jean Style black leather motorcycle jacket, a bit small now. Then we have the Black Lacquered Cabinet with curved doors and Chinese figures and other art. Lots of pictures and the explosion I remember in the Hotel.

Other than that, just the memories of good food, good friends and a trip on a Brit Sub!

They did indeed buy US commercial properties, and drove the prices up in the process. I would not be too surprised to see some bargains in the high million FRN range coming along as margin calls at home proliferate. Actually, we have a long time member that might chime in and add to the analysis. Me, I don't hold anything asian to worry about except a few souvenir coins from when I was there, and none of those are Chinese.

But we hear today that the drop rate has moderated due to government actions. I don't think the fall is ended by any means, but there might be an extension of time until it bottoms out.

Click to expand...

The government actions were to freeze half the exchange and then declare that the stock prices were now back to pre-drop levels. Since no one can buy or sell the frozen stocks the market can't set the true price. Not sure how long it will take them to figure out the next step so they can un-freeze the stocks. I'm not sure they realize they can't set stock prices by caveat. This will get interesting.

Korg groking Grok​

"An armed man is a citizen. A disarmed man is a subject." - Anonymous​